Boston’s rental prices are increasing faster than post-graduate salaries; posing unprecedented financial challenges for young adults who are looking to live in the city. The Metropolitan Area Council reported 435,000 condo units are needed in Boston within the next 25 years to keep up with the increasing demand. Countered with the majority of new supply being high-end renovated high rises and condos that are priced above what young adults deem affordable. This has kept the supply of affordable units’ static, while steadily increasing rental prices drastically.
The total rental payments and the individual’s share of expenses are used to calculate the total financial burden of an apartment. Buying a condo is a great opportunity for a young adult to lower their Effective Monthly Payment (EFP) and build equity in a condo that can become a future income producing property. Low down payments as low as 3-5% present options for young adults, who often do not have the financial resources for a conventional 20% down payment. Leveraging a low down payment can allow a young adult to purchase a condo; lowering their monthly payments with tax deductions.
Matt was recently paying $2,400 for a two bedroom rental in South Boston with his friend Scott. Matt’s salary of $75,000 netted him $46,000 after taxes because he did not have any deductions to itemize. Matt was able to save $12,000 a year but he knew if he owned a home he would be able to itemize his mortgage interest, real estate taxes, and other deductions that previously did not exceed the standard deduction of $6,100.
Matt teamed up with Scott to purchase a 2 bedroom apartment in South Boston for $425,000. They closed on the condo using a Mass Housing Loan with 3% down and no mortgage insurance. The upfront cost was $20,000 total which included a down payment, first month’s mortgage, home inspection, and other closing costs. The total monthly payments including principal, interest, taxes, and condo fee’s was $2,675, an increase of $275 from their previous rental. However, this increase does not include the tax benefits that they would realize.
The tax benefit of home ownership is why Matt and Scott are able to recognize a lower EFP despite a higher payment. Matt has a higher salary than Scott; therefore Matt is going to itemize all of the deductions while Scott utilizes the standard deduction of $6,100. Matt’s refund was $9,300 higher now itemizing deductions; decreasing the payment by $775 per month to $1,815. The EFP of their rental was $1,200 a month and now they are both recognizing a payment of only $907 a month.
With escalating rents, if they stay in his property for 4 years they can expect to save approximately $30,000 on their monthly living expenses.
If the city needs 435,000 new apartments and there is limited space for growth, Matt and Scott are in a great position. There is ample opportunity; whether they hold or sell their property they can rest easy that they will have strong rental or re-sale value.